Purchasing a Home and Your Credit


In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant that is used by most mortgage companies in helping to determine what loan program an applicant qualifies for. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, as well as the number of recent inquiries into your credit.


The three general categories of credit scoring:

• First, a borrower with a score 680 and above may be considered an A+ loan. Borrowers falling into this category may have a good chance to obtain a lower rate of interest and close their loan in a relatively short amount of time.
  
• Second, a score below 680 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made which could lead to a longer evaluation time before the loan is closed.
  
• Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. As a borrower you may need to look into sub prime or other alternative loan programs with your mortgage broker, and it may take some time before a suitable funding source is located.

Reviewing and Correcting Your Credit


Whichever mortgage broker you decide to work with, you should be able to receive a free copy of your credit report from them to review and check for any errors. You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." If the credit reporting agency cannot verify a disputed item, it must delete it. If your report contains erroneous information, the credit reporting agency must correct it. If an item is incomplete, the credit reporting agency must complete it.

If you have had credit problems, be prepared to discuss them honestly with your mortgage professional and come to your application meeting with any necessary written explanations. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. They are there to help you get your home.